BETWEEN:
and
____________________________________________________________________
Appeals heard on September 14, 2005, at Ottawa, Ontario.
Before: The Honourable Justice Lucie Lamarre
Appearances:
|
Prashant Watchmaker Lawrence Weinstein |
|
|
Justine Malone |
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996, 1997 and 1998 taxation years are dismissed with costs.
Signed at Ottawa, Canada, this 13th day of April 2007.
BETWEEN:
OTTAWA AIR CARGO CENTRE LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] These are appeals against the following reassessments by the Minister of National Revenue ("Minister"): (1) reassessments pursuant to subsection 84(3) and section 186 of the Income Tax Act ("Act") of Part IV tax for the appellant's 1995, 1996, 1997 and 1998 taxation years on taxable dividends deemed to have been received on the redemption of shares; (2) reassessments of Part III tax (sections 184 and 185 of the Act) on the excess of the dividends paid in those same years over the balance in the appellant's capital dividend account; and (3) a reassessment under Part I of the Act for the 1998 taxation year to take into account a reduced application of prior years' non-capital losses of the appellant against Part I tax due to the application by the Minister of such non-capital losses to reduce Part IV tax.
Facts
[2] The parties filed a Joint Statement of Facts, which reads as follows:
1. The Appellant is a Canadian controlled private corporation incorporated under the laws of the Province of Ontario.
2. At all material times, the sole shareholder of the Appellant was 1101332 Ontario Inc., a Canadian controlled private corporation incorporated under the laws of the Province of Ontario ("1101332").
3. During the periods under review, the Appellant owned Class B Special Shares ("Class B Shares") in the capital of Air Stol Inc. ("Air Stol").
4. During the periods under review, the Appellant and Air Stol acted at arm's length and were not connected for the purposes of Section 186 of the Income Tax Act (Canada) (the "Act").
5. On or about the following dates, the Appellant received the following proceeds (the "Proceeds") from redemptions of Class B Shares:
|
Date of Redemption |
Amount of Proceeds |
|
|
|
|
June 30, 1995 |
$1,162,000.00 |
|
June 28, 1996 |
$1,162,000.00 |
|
July 4, 1997 |
$1,014,374.00 |
|
January 5, 1998 |
$1,162,000.00 |
6. On June 30, 1995, June 28, 1996, July 4, 1997 and January 5, 1998, the Appellant declared and paid dividends to 1101332, each in the amount of the Proceeds related to such date net of costs relating [to] each such transaction (each, a "Shareholder Dividend").
7. With respect to the declaration and payment of each of the Shareholder Dividends, the Appellant filed prescribed capital dividend election form T2054 relating to the following portions of each such Shareholder Dividend (each, a "Capital Dividend"):
|
Date of Shareholder Dividend |
Amount of Capital Dividend |
|
|
|
|
June 30, 1995 |
$271,803.00 and $16,111.70 |
|
June 28, 1996 |
$290,400.00 |
|
July 4, 1997 |
$253,509.00 |
|
January 5, 1998 |
$290,415.00 |
8. In filing its tax returns for its taxation years ended December 31, 1995, 1996 and 1997 and January 31, 1998, the Appellant treated the Proceeds as capital gains under subsection 55(2) of the Act.
9. The Appellant did not file a Part IV Information Return on Form T2S(3) in any of its 1995 to 1998 taxation years and did not report receiving any taxable dividends in those years.
10. The Minister initially assessed the Appellant's T2 returns for its 1995, 1996, 1997 and 1998 taxation years by Notices of Assessment dated September 23, 1996, October 9, 1997, August 17, 1998 and December 14, 1998, respectively.
11. By Notices of Assessment dated August 17, 2001, the Appellant was assessed for its 1995, 1996, 1997 and 1998 taxation years (collectively, the "2001 Assessments") for Part IV tax with respect to taxable dividends deemed to have been received on the redemption of Class B Shares. In particular, pursuant to the 2001 Assessments, the Appellant was assessed in the following amounts:
|
Taxation Year |
Amount of Part IV Tax |
|
|
|
|
1995 |
$290,416.00 |
|
1996 |
$387,221.00 |
|
1997 |
$338,012.00 |
|
1998 |
$415,571.00 |
12. As a result of the Minister's reclassification of the Proceeds as set out in the 2001 Assessments, the balance of the Appellant's capital dividend account was reduced to an amount insufficient to allow the Appellant to pay the Capital Dividends as capital dividends.
13. The Appellant objected to the 2001 Assessments by way of Notices of Objection dated November 14, 2001 (the "2001 Objections").
14. By way of a Notice of Assessment dated March 6, 2002 and Notices of Reassessment dated October 15, 2002 and October 22, 2002 (collectively, the "2002 Assessment and Reassessments), the Minister assessed and then reassessed the Appellant for Part III tax under the Act in the following amounts (plus arrears interest and penalties) with respect to the previously claimed Capital Dividends:
|
Date of Capital Dividend |
Amount of Part III Tax |
|
|
|
|
June 30, 1995 |
$12,083.78 |
|
June 28, 1996 |
$217,800.00 |
|
July 4, 1997 |
$190,131.75 |
|
January 5, 1998 |
$217,811.25 |
15. The Appellant objected to the 2002 Assessment and Reassessments by way of letters dated April 30, 2002 and October 30, 2002 (the "2002 Objections"). In order to protect its position, the Appellant also elected by notice in writing to the Minister to treat any excess capital dividends as separate taxable dividends under subsection 184(3) of the Act (the "Protective Elections").
16. In addition, by letter dated December 10, 2002 in response to a letter dated December 9, 2003 from the Minister, the Appellant's representative at the time, Mr. Gregory Sanders of Soloway Wright LLP, advised the Minister to apply certain prior years' non-capital losses of the Appellant (the "Losses") against any Part IV tax claimed by the Minister to be payable by Appellant, to process the Protective Elections and to provide a better estimate of the exact amount of taxes and interest owing as a result of the confirmation of the 2001 Assessments and the 2002 Assessment and Reassessments. In so doing, Mr. Sanders expressly stated that the Appellant's rights to deal with such issues in a notice of appeal, if filed, were not limited. The Appellant has, in fact, appealed with respect to such issues.
17. The Minister issued Notices of Reassessment dated January 31, 2003 with respect to the Appellant's taxation years ended December 31, 1995, 1996 and 1997 and January 31, 1998 (the "2003 Part IV Reassessments"), which 2003 Part IV Reassessments deducted the Losses from the taxable dividends of the Appellant (as so reclassified by the Minister and set out in the 2001 Reassessments) for the purposes of the Part IV taxes previously assessed against the Appellant pursuant to the 2001 Assessments. The Part IV taxes of the Appellant resulting from the 2003 Part IV Reassessments were as follows:
|
Taxation Year End |
Taxable Dividend |
Loss Applied |
Part IV Tax |
|
|
|
|
|
|
December 31, 1995 |
$1,161,662 |
$1,161,363 |
$100 |
|
December 31, 1996 |
1,161,662 |
$1,161,363 |
$100 |
|
December 31, 1997 |
$1,015,036 |
$1,013,736 |
$100 |
|
January 31, 1998 |
$1,246,713 |
$ 513,427 |
$244,429 |
18. On February 19, 2003, the Minister issued a Notice of Reassessment with respect to the Appellant's taxation year ended December 31, 1998 (the "2003 Part I Reassessment") to take into account a reduced application of prior years' non-capital losses of the Appellant due to the application by the Minister of such non-capital losses pursuant to the 2003 Part IV Reassessments.
19. The Minister issued Notices of Reassessment dated March 14, 2003 with respect to the Capital Dividends previously assessed as being taxable dividends (the "2003 Part III Reassessments"), which 2003 Part III Reassessments took into account the Protective Elections and resulted in Part III taxes under the Act for the periods in question as follows:
|
Date of Taxable Dividend |
Excess Amount |
Amount Elected |
Balance Subject to Part III Tax |
Part III Tax |
|
|
|
|
|
|
|
June 30, 1995 |
$16,112 |
$16,012 |
$100 |
$75 |
|
June 28, 1996 |
$290,400 |
$290,300 |
$100 |
$75 |
|
July 4, 1997 |
$253,509 |
$253,409 |
$100 |
$75 |
|
January 5, 1998 |
$290,415 |
$290,315 |
$100 |
$75 |
20. The Appellant has objected to and appealed each of the 2001 Assessments, the 2002 Assessment and Reassessments, the 2003 Part I Reassessment, the 2003 Part III Reassessments and the 2003 Part IV Reassessments relating to its taxation years ended December 31, 1995, 1996 and 1997 and January 31, 1998, all of which are before this Court.
Issues
[3] The issues as stated in the proceedings are the following:
a) whether the proceeds paid upon the redemption of Class B shares are taxable dividends subject to Part IV tax such that the Minister correctly assessed the appellant for Part IV tax for its 1995, 1996, 1997 and 1998 taxation years;
b) whether the Minister correctly or erroneously assessed the appellant for Part III tax in respect of the excessive elections regarding the capital dividends paid to its shareholder in those same years;
c) whether the Minister correctly or erroneously determined that the appellant had no non-capital losses available to be carried forward to its 1998 taxation year;
d) whether the Minister assessed the appellant for Part III and Part IV tax within the time limitations set out in the Act.
[4] In its written submissions, the appellant restated the issues as follows:
4. The dispute between the Appellant and the Respondent relates to the applicability of subsection 55(2) of the Act to the Transactions; in particular, the issues to be decided are as follows:
(a) Whether, as submitted by the Appellant, in filing its tax returns for its 1995, 1996, 1997 and 1998 taxation years, the Appellant directly and correctly relied upon subsection 55(2) of the Act in reporting the Transactions and their net effect by working through the analytical provisions of Part IV of the Act in order to report the Proceeds paid upon the redemption of Class B Shares as being capital gains instead of taxable dividends;
(b) Whether, as submitted by the Minister, in filing its tax returns for its 1995, 1996, 1997 and 1998 taxation years, instead of relying directly upon subsection 55(2) of the Act, the Appellant should have:
(i) self-assessed for taxes upon the Proceeds paid upon the redemption of Class B Shares under subsection 186(1) of the Act;
(ii) filed an information return under subsection 187(1) of the Act with respect thereto;
(iii) paid any tax payable under subsection 186(1) of the Act;
(iv) filed its corporate tax returns on the basis that the Proceeds were taxable dividends subject to Part IV tax under the Act;
(v) either:
(A) relied upon the Minister to refund without application all amounts paid as tax under subsection 186(1) of the Act by way of paragraph 129(1)(a) of the Act; or
(B) applied in writing to the Minister to refund without application all amounts paid as tax under subsection 186(1) of the Act by way of paragraph 129(1)(b) of the Act; and
(vi) refiled its tax returns for each of its 1995, 1996, 1997 and 1998 taxation years on the basis that the Proceeds were recharacterized as capital gains by way of subsection 55(2) of the Act, which refiled tax returns would not document the foregoing transactions relating to Part IV taxes and the refund of such Part IV taxes because the reporting forms do not contemplate or provide for reporting in such manner;
(c) Whether the Minister correctly applied Part IV taxes against the Appellant under subsection 186(1) of the Act without automatically refunding such taxes under paragraph 129(1)(a) of the Act;
(d) Whether the Appellant is out of time to apply under paragraph 129(1)(b) of the Act for the payment of refunds of any Part IV taxes paid or payable under subsection 186(1) of the Act with respect to the matters under appeal; and
(e) Whether the Minister correctly assessed and/or reassessed the Appellant for Part I, Part III and Part IV taxes as a result of the foregoing.
Relevant statutory provisions
[5]
55(2)
(2) Deemed proceeds or capital gain. Where a corporation resident in Canada has received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or (2) or 138(6) as part of a transaction or event or a series of transactions or events, one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the safe-income determination time for the transaction, event or series, notwithstanding any other section of this Act, the amount of the dividend (other than the portion of it, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series)
(a) shall be deemed not to be a dividend received by the corporation;
(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and
(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property.
[Emphasis added.]
83(2)
(2) Capital dividend. Where at any particular time after 1971 a dividend becomes payable by a private corporation to shareholders of any class of shares of its capital stock and the corporation so elects in respect of the full amount of the dividend, in prescribed manner and prescribed form and at or before the particular time or the first day on which any part of the dividend was paid if that day is earlier than the particular time, the following rules apply:
(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation's capital dividend account immediately before the particular time; and
(b) no part of the dividend shall be included in computing the income of any shareholder of the corporation.
84(3)
(3) Redemption, etc. Where at any time after December 31, 1977 a corporation resident in Canada has redeemed, acquired or cancelled in any manner whatever (otherwise than by way of a transaction described in subsection (2)) any of the shares of any class of its capital stock,
(a) the corporation shall be deemed to have paid at that time a dividend on a separate class of shares comprising the shares so redeemed, acquired or cancelled equal to the amount, if any, by which the amount paid by the corporation on the redemption, acquisition or cancellation, as the case may be, of those shares exceeds the paid-up capital in respect of those shares immediately before that time; and
(b) a dividend shall be deemed to have been received at that time by each person who held any of the shares of that separate class at that time equal to that portion of the amount of the excess determined under paragraph (a) that the number of those shares held by the person immediately before that time is of the total number of shares of that separate class that the corporation has redeemed, acquired or cancelled, at that time.
89(1)
(1) Definitions. In this subdivision,
. . .
"taxable dividend" means a dividend other than
(a) a dividend in respect of which the corporation paying the dividend has elected in accordance with subsection 83(1) as it read prior to 1979 or in accordance with subsection 83(2), and
(b) a qualifying dividend paid by a public corporation to shareholders of a prescribed class of tax-deferred preferred shares of the corporation within the meaning of subsection 83(1).
112(1)
(1) Deduction of taxable dividends received by corporation resident in Canada. Where a corporation in a taxation year has received a taxable dividend from
(a) a taxable Canadian corporation, or
(b) a corporation resident in Canada (other than a non-resident-owned investment corporation or a corporation exempt from tax under this Part) and controlled by it,
an amount equal to the dividend may be deducted from the income of the receiving corporation for the year for the purpose of computing its taxable income.
129(1)
(1) Dividend refund to private corporation. Where a return of a corporation's income under this Part for a taxation year is made within 3 years after the end of the year, the Minister
(a) may, on mailing the notice of assessment for the year, refund without application therefore an amount (in this Act referred to as its "dividend refund" for the year) equal to the lesser of
(i) 1/3 of all taxable dividends paid by the corporation on shares of its capital stock in the year and at a time when it was a private corporation, and
(ii) its refundable dividend tax on hand at the end of the year; and
(b) shall, with all due dispatch, make the dividend refund after mailing the notice of assessment if an application for it has been made in writing by the corporation within the period within which the Minister would be allowed under subsection 152(4) to assess tax payable under this Part by the corporation for the year if that subsection were read without reference to paragraph 152(4)(a).
152(1)
(1) Assessment. The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer's tax payable under this Part for the year.
152(3.1)
(3.1) Definition of "normal reassessment period". For the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment period for a taxpayer in respect of a taxation year is
(a) where at the end of the year the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation, the period that ends 4 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year; and
(b) in any other case, the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year.
152(4)
(4) Assessment and reassessment. The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or
. . .
165(3)
(3) Duties of Minister. On receipt of a notice of objection under this section, the Minister shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess, and shall thereupon notify the taxpayer in writing of the Minister's action.
165(5)
(5) Validity of reassessment. The limitations imposed under subsections 152(4) and (4.01) do not apply to a reassessment made under subsection (3).
Part III
Additional Tax on Excessive Elections
184(2)
(2) Tax on excessive elections Where a corporation has elected in accordance with subsection 83(2), 130.1(4) or 131(1) in respect of the full amount of any dividend payable by it on shares of any class of its capital stock and the full amount of the dividend exceeds the portion thereof deemed by that subsection to be a capital dividend or capital gains dividend, as the case may be, the corporation shall, at the time of the election, pay a tax under this Part equal to 3/4 of the excess.
185(1)
(1) Assessment of tax. The Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), 130.1(4) or 131(1), assess the tax, if any, payable under this Part in respect of the election and send a notice of assessment to the corporation.
PART IV
Tax on Taxable Dividends Received by Private Corporations
186(1)
(1) Tax on assessable dividends. Every corporation (in this section referred to as the "particular corporation") that is at any time in a taxation year a private corporation or a subject corporation shall, on or before its balance-due day for the year, pay a tax under this Part for the year equal to the amount, if any, by which the total of
(a) 1/3 of all assessable dividends received by the particular corporation in the year from corporations other than payer corporations connected with it, and
(b) all amounts, each of which is an amount in respect of an assessable dividend received by the particular corporation in the year from a private corporation or a subject corporation that was a payer corporation connected with the particular corporation, equal to that proportion of the payer corporation's dividend refund (within the meaning assigned by paragraph 129(1)(a)) for its taxation year in which it paid the dividend that
(i) the amount of the dividend received by the particular corporation
is of
(ii) the total of all taxable dividends paid by the payer corporation in its taxation year in which it paid the dividend and at a time when it was a private corporation or a subject corporation
exceeds 1/3 of the total of
(c) such part of the particular corporation's non-capital loss and farm loss for the year as it claims, and
(d) such part of the particular corporation's
(i) non-capital loss for any of its 7 taxation years immediately preceding or 3 taxation years immediately following the year, and
(ii) farm loss for any of its 10 taxation years immediately preceding or 3 taxation years immediately following the year
as it claims, not exceeding the portion thereof that would have been deductible under section 111 in computing its taxable income for the year if subparagraph 111(3)(a)(ii) were read without reference to the words "the particular taxation year and" and if the corporation had sufficient income for the year.
186(3)
(3) Definitions -- The definitions in this subsection apply in this Part.
"assessable dividend" means an amount received by a corporation at a time when it is a private corporation or a subject corporation as, on account of, in lieu of payment of or in satisfaction of, a taxable dividend from a corporation, to the extent of the amount in respect of the dividend that is deductible under section 112, paragraph 113(1)(a), (b) or (d) or subsection 113(2) in computing the recipient corporation's taxable income for the year.
186(4)
(4) Corporations connected with particular corporation. For the purposes of this Part, a payer corporation is connected with a particular corporation at any time in a taxation year (in this subsection referred to as the "particular year") of the particular corporation if
(a) the payer corporation is controlled (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) by the particular corporation at that time; or
(b) the particular corporation owned, at that time,
(i) more than 10% of the issued share capital (having full voting rights under all circumstances) of the payer corporation, and
(ii) shares of the capital stock of the payer corporation having a fair market value of more than 10% of the fair market value of all of the issued shares of the capital stock of the payer corporation.
187(1)
(1) Information return. Every corporation that is liable to pay tax under this Part for a taxation year in respect of a dividend received by it in the year shall, on or before the day on or before which it is required to file its return of income under Part I for the year, file a return for the year under this Part in prescribed form.
187(3)
(3) Provisions applicable to Part.Sections 151, 152, 158 and 159, subsections 161(7) and (11), sections 162 to 167 and Division J of Part I are applicable to this Part with such modifications as the circumstances require.
Appellant's argument
[6] The appellant's argument and relief sought, as found in its written submissions, are reproduced below:
6. The Appellant is "a corporation resident in Canada".
Joint Statement of Fact, paragraph 1.
7. The Appellant received taxable dividends by way of the recharacterization of the Proceeds paid upon the redemption of Class B Shares as taxable dividends.
Joint Statement of Fact, paragraph 5.
Paragraph 84(3)(b).
8. With respect to each such taxable dividend, the Appellant was entitled to a deduction under subsection 112(1) of the Act.
Subsection 112(1).
9. The payments of the Proceeds upon the redemption of Class B Shares were each part of a transaction or event or series of transactions or events, one of the results of which was to effect a significant reduction in the portion of the capital gain that, but for the treatment of such redemptions as dividends, would have been realized on a disposition at fair market value of any such Class B Shares immediately before the dividend. In particular, the transactions significantly reduced the capital gain otherwise realizable upon any sale of the Class B Shares in that between $1,104,374 and $1,162,000 in each applicable taxation year was reclassified as a taxable dividend instead of as a capital gain.
Joint Statement of Facts, paragraph 5.
Subsection 84(3).
10. No "safe income" issues arise in the present appeal.
11. The provisions of the parenthetical clause "other than the portion of it, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series" in subsection 55(2) of the Act (the "Parenthetical Clause") are, because of the words "subject to", analytical requirements rather than procedural requirements of the Act.
Subsection 55(2).
12. The Appellant, having received taxable dividends in the form of the Proceeds, recognized that it was entitled to refunds in respect of payments to its sole shareholder, 1101332 Ontario Inc., also a taxable Canadian corporation, which payments would have the effect of satisfying the requirements of the Parenthetical Clause, thereby triggering the mandatory application of paragraphs 55(2)(a) and 55(2)(b) of the Act, which provisions operate "notwithstanding any other section of" the Act.
Paragraph 129(1)(a).
Paragraph 129(1)(b).
Subsection 55(2).
13. Having undertaken the foregoing analysis, the Appellant filed its 1995, 1996, 1997 and 1998 tax returns on the basis that the Act recharacterizes the Proceeds as being capital gains pursuant to subsection 55(2).
Subsection 55(2).
14. The Minister reassessed the Appellant as having failed to report the Proceeds as taxable [dividends] under subsection 186(1) of the Act but, in so doing, the Minister failed to also reassess the Appellant on the basis that any such reporting must result in the mandatory payment of a refund by the Minister in an amount equal to any tax paid under subsection 186(1) of the Act.
Subsection 186(1).
Paragraph 129(1)(a).
15. Even if the Minister's reassessment of the Appellant as having failed to report the Proceeds as taxable dividends under subsection 186(1) of the Act was upheld by this Honourable Court and the Appellant was assessed for Part IV taxes in the manner set out in subsection 186(1) of the Act, the Appellant would be entitled to a refund of all such Part IV taxes.
Paragraph 129(1)(b).
16. Although any application of paragraph 129(1)(b) of the Act is restricted by subsection 152(4) of the Act, the applicability of subsection 152(4) to the matters under this Appeal is extended by way of the application of subsection 165(5) of the Act.
Paragraph 129(1)(b).
Subsection 152(4).
Subsection 165(5).
17. The Appellant's request to have certain non-capital losses applied against any Part IV taxes owing by the Appellant was specifically made on a prophylactic basis to protect the Appellant in the event that this Appeal was decided against the Appellant and such request does not bind either this Honourable Court or the Minister because the taxation years to which such request applies are all open and under appeal herein.
Joint Statement of Facts, paragraphs 16 and 20.
V. RELIEF SOUGHT
18. The Appellant respectfully requests that this Honourable Court order the Minister to reassess the Appellant's 1995, 1996, 1997 and 1998 taxation years on the basis that the transactions relating to the Proceeds as reported in the Appellant's tax returns as filed complied with all requirements under the Act, with costs to be paid by the Respondent to the Appellant.
19. In the alternative, if this Honourable Court determines that the Proceeds were subject to Part IV tax in accordance with the Respondent's submissions, the Appellant respectfully requests that this Honourable Court order the Minister to reassess the Appellant's 1995, 1996, 1997 and 1998 taxation years on the following basis:
(a) the Appellant shall be liable to pay Part IV taxes upon the amounts of the Proceeds with respect to its 1995, 1996, 1997 and 1998 taxation years pursuant to subsection 186(1) of the Act;
(b) none of the Appellant's non-capital losses shall be applied against any Part IV tax payable by the Appellant with respect to its 1995, 1996, 1997 and 1998 taxation years;
(c) the Appellant shall be entitled to refunds of any and all amounts related to Part IV taxes payable by the Appellant with respect to its 1995, 1996, 1997 and 1998 taxation years pursuant to paragraph 129(1)(b) of the Act;
(d) the amounts of the Part IV taxes payable by the Appellant shall be offset in their entirety by the amounts of the refunds of such taxes to which the Appellant is entitled under paragraph 129(1)(b) of the Act;
(e) the Proceeds shall be deemed to be capital gains of the Appellant pursuant to subsection 55(2) of the Act;
(f) capital gains taxes shall be assessed against the Appellant with respect to the deemed capital gains relating to the Proceeds as recharacterized by subsection 55(2) of the Act;
(g) the Appellant's non-capital losses shall be applied against any capital gains tax payable by the Appellant with respect to its 1995, 1996, 1997 and 1998 taxation years in the maximum amounts permissible under the Act for each such taxation year;
(h) the Appellant's liability for Part I tax, Part III tax and Part IV tax with respect to its 1995, 1996, 1997 and 1998 taxation years shall be reassessed on the foregoing basis; and
(i) costs shall be awarded against the Respondent in favour of the Appellant.
Respondent's argument
[7] The respondent's argument and relief sought, as found in her written submissions, are reproduced below:
A. The Proceeds are Subject to Part IV Tax
11. Pursuant to subsection 84(3) of the Act, the proceeds paid to the Appellant upon the redemption of its Class B Special shares of Stol in its 1995, 1996, 1997 and 1998 taxation years are deemed to be taxable dividends paid by Stol in those years.
Paragraph 84(3)(b)
12. The dividends deemed to have been received by the Appellant were, for purposes of the Act, "taxable dividends" and, for purposes of Part I tax, the deemed dividends were deductible under section 112 of the Act.
Subsections 248(1), 89(1) and 112(1)
13. Accordingly, for purposes of Part IV of the Act, the deemed dividends were "assessable dividends".
Subsection 186(3)
14. Subsection 186(1) levies a refundable tax ("Part IV tax") on dividends received by private corporations other than dividends received from a connected payor corporation. As the Appellant and Stol were at all relevant times not connected for the purposes of subsection 186(4) of the Act, the amount of the deemed dividends received from Stol was therefore subject to Part IV tax pursuant to subsection 186(1) of the Act.
Subsections 186(1) and 186(4)
15. The circumstance that the taxable dividends deemed to have been received by the Appellant may also, in whole or in part, be amounts described in the introductory paragraph of subsection 55(2) of the Act does not take such amounts out of Part IV of the Act.
943963 Ontario Inc. v. The Queen, 99 DTC 802, at para. 25
16. The Appellant did not self-assess Part IV tax. In due course, the Minister assessed Part IV tax, which was later reduced to nominal amounts by the application of non-capital losses.
Joint Statement of Facts, paras. 9, 11 and 17
17. The circumstance that Part IV tax on particular dividends might be reduced to nominal amounts, or even eliminated entirely, by the application of non-capital losses does not mean that the dividends were, in consequence, not "subject to Part IV tax". The phrase "subject to Part IV tax" means that the dividends in issue were exposed to or liable to tax under Part IV.
Shorter O.E.D., p. 2167, "subject"
18. The dividends in issue remain "assessable dividends" referred to and exposed to tax by paragraph 186(1)(a) of the Act. The application of non-capital losses in paragraph 186(1)(d) reduces the quantum of tax payable without altering the character of the dividends in issue as "assessable dividends" for purposes of Part IV tax.
Subsection 186(1)
B. Subsection 55(2) is not applicable
19. Subsections 55(2) to 55(5) of the Act form a group of anti-avoidance provisions aimed at preventing corporations resident in Canada from converting a capital gain on the disposition of shares of another corporation into a dividend which would not be taxable by virtue of subsections 112(1) or 186(1) of the Act.
Subsections 55(2) to 55(5)
20. Although these provisions are anti-avoidance provisions, there could be circumstances in which a taxpayer may prefer to have subsection 55(2) apply to dividends received from another corporation. In the case at hand, the Appellant disposed of substantial non-capital losses it could apply to its 1995 to 1998 taxation years to offset the capital gains arising from the redemption of its Class B Special shares in Stol. The non-taxable portion of these gains could then be paid to its shareholder as non-taxable capital dividends.
21. Subsection 55(2) is however not applicable where the dividend received by the corporation is subject to tax under Part IV. Dividends subject to tax under Part IV are excluded from the application of subsection 55(2) unless the Part IV tax has been refunded as a part of a series of transactions which includes the redemption of shares which gave rise to the subsection 84(3) deemed dividend.
Subsection 55(2)
22. On the facts of the present case, the Respondent agrees with the Appellant that, absent the exclusion set out in the parentheses, the deemed dividends received by the Appellant would be described in subsection 55(2) of the Act.
23. However, the deemed dividends were subject to Part IV tax and therefore are excluded from the ambit of subsection 55(2), unless the Part IV tax is "refunded as a consequence of the payment to a corporation where the payment is part of the series".
Subsection 55(2)
24. In this case, the Appellant did not report the Proceeds as taxable dividends, with the consequence that no Part IV tax was paid and there was, as a further result, no possible refund of that Part IV tax to the Appellant when dividends were paid by it to its shareholder, 1101332 Ontario Inc.[1]
25. When the Minister assessed the Appellant to Part IV tax with respect to the deemed dividends, the Appellant chose to reduce the resulting liability to a nominal amount through the application of losses. No dividend refund was sought pursuant to subsection 129(1) of the Act.[2]
Subsection 129(1)
26. Consequently, there has not been any dividend refund which would take the dividends in issue outside the exclusion to the operation of subsection 55(2) set out in the parentheses at the end of the preamble to the subsection.
27. As the deemed dividends resulting from the Proceeds are taxable dividends subject to Part IV tax, subsection 55(2) is therefore not applicable to the case at bar and the Proceeds are therefore taxable as dividends received by the Appellant and cannot be treated as proceeds of disposition. The Appellant therefore erroneously treated the Proceeds as proceeds of disposition instead of taxable dividends and the Minister properly assessed the Appellant's 1995 to 1998 taxation years to include the amount of the Proceeds as taxable dividends.
B. The Appellant is liable to pay Part III tax
28. As subsection 55(2) does not apply to treat the deemed dividend as a capital gain, there were no capital gains resulting form [sic] the redemption of the Class B Special shares of Stol in the 1995 to 1998 taxation years. The elections filed by the Appellant under subsection 83(2) of the Act to pay capital dividends to its shareholder equal to the non-taxable portion of what it reported as capital gains resulting form [sic] the redemption of the Class B Special shares of Stol are therefore invalid.
29. Subsection 184(2) of the Act provides that where a corporation has elected, in accordance with subsection 83(2), in respect of the full amount of any dividend payable by it which exceeds the portion thereof deemed to be a capital dividend, the corporation is liable to pay tax under Part III equal to ¾ of the excess.
Subsections 83(2) and 184(2)
C. The Assessments under Parts III and IV are within the time contemplated by the Act
30. Assessments under each part of the Act are to be treated as separate assessments. For the purposes of part IV tax, a taxpayer is required under subsection 187(1) of the Act to file, in prescribed form, a return for the year on or before the day on which it is required to file its return of income under Part I. By virtue of subsection 187(3) of the Act, section 152, along with other provisions specified therein, are applicable to Part IV.
Subsections 187(1) and 187(3)
31. The Appellant did not file a Part IV information return (form T2S(3)) for any of its 1995 to 1998 taxation years and the Minister's initial assessments of Part IV tax on August 17, 2001 were not limited by the provisions of section 152 of the Act.
32. Section 185 of the Act provides that the Minister will assess tax under Part III following the filing of elections made in accordance with subsection 83(3) [sic] of the Act. The assessments on March 6, 2002 of the Appellant's tax liability under Part III of the Act were initial assessments made within the time limitations permitted in the Act.
D. What the Appellant might have done
33. It may be observed that the Appellant might have reported the deemed dividends as assessable dividends under Part IV and paid the appropriate tax, claimed a dividend refund with respect to the dividends paid to it [sic] shareholder, 1101332 Ontario Inc, which would have had a Part IV tax liability as a consequence, and thereby ensured that the deemed dividends would be converted back to Proceeds of disposition by the operation of subsection 55(2).
34. However, taxation is based, not on what a taxpayer might have done, but on what was actually done.
Antoine Guertin Ltée v. Canada, [1988] 2 F.C. 67 at para. 7 (C.A.).
V. RELIEF SOUGHT
He [sic] requests that the appeal [sic] be dismissed with costs.
Analysis
[8] I agree with the respondent's analysis. The operation of subsection 55(2) was discussed in The Queen v. Canutilities Holdings Ltd., 2004 FCA 234, by Rothstein J.A. (as he then was) at paragraphs 2 and 3:
A succinct summary of the operation of subsection 55(2) is set forth in a case comment on the Tax Court decision in this case by Mark W. Lobsinger entitled "Capital Gains Strips and Normal Course Dividends" (2003) 51:6 Can. Tax. J. 2291. I paraphrase that summary as follows.
Subsection 55(2) of the Act is a capital gain stripping anti avoidance rule. Under the rule, an otherwise tax free inter-corporate dividend that is deemed to arise on a redemption of shares is deemed to be proceeds of disposition of the shares where the deemed dividend is part of a "series of transactions or events" that results in a significant reduction of capital gains realized on the disposition of the shares. Under an exception to this rule ("the Part IV tax exception"), a deemed dividend will not be re-characterized as proceeds of disposition of shares to the extent that the redeeming shareholder is subject to Part IV tax on the deemed dividend. However, the Part IV tax exception does not apply if the Part IV tax is refunded on the payment of further dividends by the recipient corporation to other corporations where the further dividend payments are part of the same "series of transactions or events" that includes the initial deemed dividend.
[9] In other words, Rothstein J.A. says that a deemed dividend will not be recharacterized as a capital gain where the shareholder is subject to Part IV tax on that deemed dividend, but that this exception does not apply where further dividends are paid and a refund of the Part IV tax received. Rothstein J.A.'s simplified explanation of the operation of subsection 55(2) appears to be procedural in nature rather than reflecting the analytical view argued for by the appellant.
[10] In Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, at paragraph 10, the Supreme Court of Canada describes the modern rule of statutory interpretation stated as follows by Elmer Driedger in Construction of Statutes, 2nd ed., (Toronto: Butterworths, 1983), at page 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words play a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.
[11] At paragraph 54 of Canada Trustco, the Supreme Court states:
In interpreting the provisions of the Income Tax Act, the statutory language must be respected and should be interpreted according to its well-established legal meaning. In some cases, a contextual and purposive interpretation may add nuance to the well-established legal meaning of the statutory language. . . .
[12] This interpretation is in a way in line with the test accepted in other tax cases in the past, for example, in Friesen v. The Queen, [1995] 2 C.T.C. 369, 95 DTC 5551, in which Major J. quoted Peter W. Hogg and Joanne E. Magee, Principles of Canadian Income Tax Law (Scarborough, Ont.: Carswell, 1995) at pages 453-54 as follows:
It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court's view of the object and purpose of the provision . . . [The Antosko case] is simply a recognition that "object and purpose" can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision".
[13] Finally, at paragraph 66 of Canada Trustco, the Supreme Court reiterates:
. . . The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act.
[14] With regard to the interpretation of statutes, although recent case law invites the courts to consider context and purpose on a more equal footing with the text of a provision, this is not a licence to rewrite the law. It is clear that the judiciary must not usurp the role of Parliament (Ludmer v. M.N.R., [2002] 1 C.T.C. 95, at page 109, paragraph 38).
[15] To summarize, although modern-day statutory interpretation involves striking a balance between a textual, a contextual and a purposive analysis, the decision of the Supreme Court of Canada in Canada Trustco appears to favour giving greater weight to the text of a provision in the balancing of these interpretive means where the meaning of the text is precise and unequivocal.
[16] In the present case, in my opinion, the wording of the provisions of the "parenthetical clause", as it is referred to by the appellant in paragraph 11 of its written submissions, is clear and precise; accordingly, the text of the provision should govern.
[17] Indeed, the contentious part of subsection 55(2), that is, the parenthetical clause reads as follows:
. . . notwithstanding any other section of this Act, the amount of the dividend (other than the portion of it, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series) . . . shall be deemed not to be a dividend received by the corporation . . .
[Emphasis added.]
[18] The appellant says that the use of the words "subject to" makes the provisions of the parenthetical clause analytical rather than procedural requirements. The appellant goes on to say, at paragraph 12 of its written submissions, that it "recognized that it was entitled to refunds in respect of payments to its sole shareholder, 1101332 Ontario Inc. . . . which payments would have the effect of . . . triggering the mandatory operation of paragraphs 55(2)(a) and 55(2)(b)". The appellant's position is therefore that it did not have to formally remit Part IV tax on the taxable dividends that flowed through to 1101332 Ontario Inc. in order for subsection 55(2) to apply. Rather, it could rely on the application of subsection 55(2) to the facts by virtue of the fact that it could have remitted Part IV tax on those taxable dividends and would thus have been entitled to a refund of Part IV tax. The respondent, on the other hand, argues that the application of subsection 55(2) is not based on hypotheticals. In other words, the respondent asserts that the appellant cannot simply say that the section would have or could have or might have applied. In order for the section to apply, the appellant must not only have received dividends that are subject to Part IV tax, but must also have paid Part IV tax on those dividends that flowed through to shareholders and have in fact received a refund.
[19] According to Sullivan and Driedger on the Construction of Statutes, 4th ed. by Ruth Sullivan (Markham, Ont.: Butterworths, 2002), at page 63, the distinction between procedural and substantive requirements is often invoked, particularly in situations where a party has fulfilled the substantive prerequisites of a provision but not the procedural requirements. In such cases, it is argued, it is rather unfair that where the prerequisites for a right or privilege are met in substance the right or privilege should be denied on the basis of lack of compliance with procedural formalities.
[20] In my view, the words used in the provisions of the parenthetical clause are not devoid of sense, nor are they purely procedural in nature.
[21] In terms of the "textual" operation of subsection 55(2), the dividend amount is deemed not to be a dividend, but rather proceeds of disposition on the sale of shares. The portion of the provision in parentheses enunciates an exception to the operation of subsection 55(2), and that exception is with regard to non-refunded Part IV tax. The portion of a dividend for which a refund of Part IV tax is not received is not subject to recharacterization. This seems to be all the more true as the phrase "subject to tax under Part IV that is not refunded" does not sound either hypothetical or analytical. It appears to require that a procedure be followed to the letter, which leads me to believe that the requirement of an actual refund of Part IV tax is mandatory for the dividend to be recharacterized as a capital gain under subsection 55(2).
[22] In terms of a contextual and a purposive approach, in relation to the present case subsection 55(2) must be analyzed in conjunction with subsection 84(3). The purpose of subsection 84(3) is to tax as a dividend all amounts paid by a Canadian resident corporation on the redemption, acquisition or cancellation of any of the shares of any class of its capital stock, except to the extent the amount paid represents a return of paid-up capital ("PUC"). Where a redemption amount is greater than the PUC, the provision operates to prevent the surplus from being characterized as a capital gain, which is taxed at a preferential rate, and instead requires that it be recognized as a taxable dividend. The goal of subsection 84(3) is to prevent dividend stripping.
[23] In the year of receipt, the dividend is included in the recipient's income. Where the recipient is a corporation, the taxable dividend is eligible for the relief provided by subsection 112(1). Part IV applies to intercorporate dividends so as to effectively bring the dividend out of an intermediary corporate entity and place it in the hands of the final recipient at the individual level, who is going to pay tax on it ultimately. Part IV achieves this by levying a tax (Part IV tax) that is refundable once the dividend is paid out.
[24] If an amount is subject to Part IV tax and that tax is not refunded because the amount was not redistributed as a taxable dividend to the corporation's shareholder, then the dividend amount received in the corporation is effectively taxed at a rate equivalent to the rate applicable to a dividend received by an individual shareholder.
[25] Conversely, section 55 was enacted primarily to counter transactions known as "capital gains strips", which were made possible because of the effectively tax-free status of most intercorporate dividends.
[26] Sharlow J.A. discussed subsection 55(2) in The Queen v. VIH Logging Ltd., 2005 DTC 5095, [2005] 1 C.T.C. 387, at paragraph 20:
[20] Subsection 55(2) of the Income Tax Act was enacted in 1980 to deter transactions known as "capital gains strips", that are designed to avoid capital gains tax on the sale of corporate shares. The common element in all capital gains strips is a tax-free intercorporate dividend paid on shares before they are sold. A dividend may reduce a capital gain by reducing the fair market value of the shares (and thus the proceeds of disposition, assuming the purchaser will not pay more than the shares are worth). A stock dividend may also reduce a capital gain by increasing the adjusted cost base of the shares.
[27] The mischief that subsection 55(2) is aimed at is clearly described in the 1979 federal budget which introduced this provision. Because of its importance in these appeals, I reproduce the relevant passage in its entirety:
Important amendments will be introduced to clarify and reinforce the intent of the anti-avoidance provision relating to artificial or undue reductions in capital gains.
Concerns have been expressed as to the legislative scope and intended application of this anti-avoidance provision. A number of plans have been developed whereby, as a preliminary step to certain sales of shares, a corporate vendor extracts what are in substance sale proceeds in the form of tax-free intercorporate dividends or deemed dividends to decrease the value − or increase the cost base − of the shares to the point where capital gains tax is avoided. These tax-free dividends frequently exceed the earnings of the corporation to be sold. Such excessive dividends are usually motivated only by the vendor's desire to reduce his exposure to capital gains tax.
As a general rule, the objective of the tax law is that on most arm's-length and on certain non-arm's-length intercorporate share sales, a capital gain should arise at least to the extent that the sale proceeds reflect the unrealized and untaxed appreciation since 1971 in the value of underlying assets. This objective will generally be achieved where tax-free dividends on shares are limited to post-1971 taxed retained earnings.
Rules will be introduced to clarify the intention of the law in this respect. These rules will ensure that where it can reasonably be considered that one of the main purposes of a tax-free intercorporate dividend was to reduce the proceeds on a disposition of a share, the capital gain otherwise determined will be adjusted to reflect the extent to which aggregate tax-free dividends have exceeded post-1971 taxed retained earnings.
[28] In 729658 Alberta Ltd. v. The Queen, 2004 DTC 2909, [2004] 4 C.T.C. 2261 (TCC), Woods J. stated that the scheme of the provision itself is not apparent. She put it in the following terms at paragraph 5:
The legislative scheme is not apparent from subsection 55(2). However, it was described by the government at the time the section was introduced. The scheme was succinctly described by Noël, J.A. in Kruco Inc. v. R., [2003 DTC 5506] [2003] 4 C.T.C. 185 (F.C.A.):
The goal was to ensure that the capital gain inherent in the shares of a corporation that is attributable to an unrealized appreciation since 1971 in the value of the underlying assets of the corporation was not avoided by the use of intercorporate tax-free dividends (subsection 112(1)). At the same time, Parliament did not want to impede the tax-free flow of dividends that were attributable to income which had already been taxed.
. . .
Conceptually, this approach captures the tax applicable to the portion of the notional gain attributable to an increase in value of the underlying assets while maintaining the tax-free treatment of that part of this gain attributable to "income earned or realized" since 1971.
[29] At one time, prior to 1983, subsection 55(2) did not apply to amounts that were subject to Part IV tax at all. Indeed, the legislators originally drafted subsection 55(2) with the following words in parentheses: "other than the portion thereof, if any, subject to tax under Part IV", indicating clearly that the provision did not capture dividends subject to Part IV tax. In 1983, subsection 55(2) was amended so that the words in parentheses read: "other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series". [Emphasis added.]
[30] The Department of Finance Technical Notes issued in 1982, around the time of the amendment to the parenthetical words in subsection 55(2), state the following:
Subsection 55(2) deals with certain intercorporate dividends that are ordinarily tax-free. To prevent the avoidance of tax, such dividends are treated as proceeds of disposition of a share or a gain from the disposition of capital property. There are certain exceptions to this treatment and amendments to subsection 55(2) affect two of these exceptions.
Subsection 55(2) does not deny dividend treatment when the gain is attributable to income earned or realized by a corporation after 1971. The first change clarifies that, for this purpose, post-1971 income is to be calculated up to the date of the relevant transaction or event or the commencement of the relevant series of transactions or events that bring subsection 55(2) into play. Thus, the income of a corporation earned or realized subsequent to that date cannot be used to reduce the tax liability resulting from the application of subsection 55(2).
Subsection 55(2) does not apply to dividends subject to the refundable tax under Part IV. The second change provides that the exception for dividends subject to Part IV tax will only apply if the tax is not refunded as a consequence of the payment of an intercorporate dividend that is part of the series of transactions or events.
[31] The 1983 amendment to subsection 55(2) is an indication that the legislators specifically clarified the wording thereof so as to achieve a particular outcome.
[32] In my opinion, the historical context favours the respondent's position. The "subject to" portion of the parenthetical clause, on which the appellant focused, must not be isolated but must be looked at in context with the words added by the 1983 amendment. The words thus added seem to clearly require that a refund of Part IV tax have been obtained as a consequence of a further dividend payment in order for subsection 55(2) to apply.
[33] This is also a reasonable conclusion in the context of a purposive analysis. The purpose of the provision is to address avoidance. The parenthetical clause sets out an exemption: the subsection does not apply where the taxpayer has not received a refund of Part IV tax. This is a reasonable exemption, because if the refund of Part IV tax is not received, then tax has been paid, not avoided; hence subsection 55(2) need not be applied.
[34] As a matter of fact, the course followed by the appellant in the present case led to a kind of tax avoidance. Indeed, in recharacterizing as a capital gain the proceeds from the redemption of shares, without having previously paid the Part IV tax thereon, the appellant redistributed the proceeds to its subsidiary tax-free as a capital dividend on which the subsidiary did not pay Part IV tax. This capital dividend was presumably redistributed to the ultimate individual shareholder or shareholders also tax-free. On the other hand, if the appellant had taken the path indicated in subsection 55(2), it would have paid Part IV tax on the deemed dividend and claimed a refund on its distribution to its subsidiary, which in turn would have paid Part IV tax on the amount so distributed. The subsidiary would then have claimed a refund on the distribution of that deemed dividend to the individual shareholder, who would have ultimately been taxed on that amount. There would thus have been compliance with the scheme of the Act, that is, the redemption of shares would have triggered a deemed dividend except to the extent that the amount paid represented a return of PUC.
[35] This leads me to reiterate that the words used in the provisions of the parenthetical clause are not devoid of sense. Nor are they purely procedural in nature. I therefore conclude that the appellant had to comply with the wording of subsection 55(2) in order to be able to recharacterize the proceeds received from the redemption of its shares as a capital gain.
[36] With respect to the relief sought by the appellant, namely, that it be entitled to refunds of any and all amounts of Part IV tax payable with respect to its 1995 through 1998 taxation years, pursuant to paragraph 129(1)(b) of the Act, and that the amounts of Part IV tax payable by the appellant be offset in their entirety by the amounts of the refunds of such tax, I agree with the respondent that this request cannot be granted at this stage.
[37] The appellant did not make an application in writing for such a refund within the period within which the Minister would be allowed under subsection 152(4) to assess tax payable under Part I, as required by paragraph 129(1)(b). Indeed, when the Minister assessed the appellant for Part IV tax with respect to deemed dividends, the appellant chose to reduce the resulting liability to a nominal amount through the application of losses thereto. No refund of Part IV tax was sought pursuant to subsection 129(1) of the Act and indeed no refund was given to the appellant. It is now too late to seek one.
[38] Subsection 165(5) referred to by the appellant only applies to a reassessment made pursuant to subsection 165(3) (i.e., the limitations imposed under subsection 152(4) do not apply to a reassessment in response to a notice of objection). It does not apply to the time limit under paragraph 129(1)(b) for making an application for a refund.
[39] I accordingly conclude that subsection 55(2) is not applicable to the case at bar. Therefore, the Minister properly assessed with respect to the appellant's 1995 to 1998 taxation years by including as taxable dividends the amount of the proceeds paid to the appellant upon the redemption of its Class B special shares of Air Stol Inc. in those years. As a result, the 2003 Part I, Part III and Part IV reassessments, as referred to in the Joint Statement of Facts were justified. I also agree with the respondent that, for the reasons set out in paragraphs 30-32 of the respondent's submissions, the Minister's assessment of the appellant for Part III and Part IV tax was made within the time limitations contemplated by the Act.
Conclusion
[40] I therefore conclude that the appellant's liability for Part I tax, Part III tax and Part IV tax with respect to its 1995, 1996, 1997 and 1998 taxation years as reassessed must be confirmed.
[41] The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 13th day of April 2007.
"Lucie Lamarre"
Lamarre J.
COURT FILE NO.: 2003-1689(IT)G
STYLE OF CAUSE: OTTAWA AIR CARGO CENTRE LTD. v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: September 14, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice Lucie Lamarre
DATE OF JUDGMENT: April 13, 2007
APPEARANCES:
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Counsel for the Appellant: |
Paul LaBarge Prashant R. Watchmaker Lawrence Weinstein |
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Counsel for the Respondent: |
Ernest Wheeler Justice Malone |
COUNSEL OF RECORD:
Firm: LaBarge Weinstein
Professional Corporation
Ottawa, Ontario
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] It may be observed that the dividends paid to 1101332 Ontario Inc would not have led to Part IV tax liability in that corporation because the Appellant, as payer of the dividends, was connected to 1101332 Ontario Inc, thereby excluding the dividends from the ambit of s. 186(1)(a), and because the Appellant received no dividend refund, thereby excluding the dividends from the ambit of s. 186(1)(b). The normal result whereby Part IV liability flows up a corporate chain along with the dividends to which it relates could not have occurred in the present case.
[2] At the time of the Part IV reassessments, August 17, 2001, the time for doing so had already expired with respect to the Appellant's 1995 and 1996 taxation years. With respect to the 1997 and 1998 taxation years, the time for doing so expired shortly afterwards. This result is not unreasonable, insofar as the Minister would very likely find himself statute-barred from passing the Part IV tas [sic] liability along to the connected corporation which received the dividends paid by the Appellant.